Consumers intolerant of inflation
For most ET readers, inflation has not exactly caused a decline in their living standards.
By Sugata Ghosh, |
The govt has to deal with a new animal. When EMI payers in our cities raise hell, the benefits often trickle down to the farmer in Nandurbar. Today, we are far more intolerant of ���inflation��� than we were a decade ago. It���s the talking point everywhere.
Something has changed quietly. It���s not higher spending, better salary and improved lifestyle. It���s something more irreversible: today, we are far more intolerant of ���inflation��� than we were a decade ago. The media has covered the inflation story more widely than ever before, the think-tank within the government is obsessed with it, and there have been sweeping measures like clampdown on futures trading in wheat and rice in the hunt for a scapegoat.
Something has changed quietly. It���s not higher spending, better salary and improved lifestyle. It���s something more irreversible: today, we are far more intolerant of ���inflation��� than we were a decade ago. The media has covered the inflation story more widely than ever before, the think-tank within the government is obsessed with it, and there have been sweeping measures like clampdown on futures trading in wheat and rice in the hunt for a scapegoat.
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But for most ET readers, inflation has not exactly caused a decline in their living standards. (There could be other reasons why they may be feeling the pinch: big home loans, expensive schooling and temptations like a plasma TV; but surely not inflation). Still, inflation remains the talking point.
We may not be as paranoid as West Europeans, who have historically experienced low inflation. But we have certainly redefined the threshold. Why? India, like some of the other emerging markets, is fast getting used to high growth and low inflation. A few things have helped it happen. Less segregated markets, a surge in productivity and a sharp focus by central banks to check inflation, have enabled many economies to grow without the spectre of runaway prices.
Of course, free trade can be double-edged; for instance, soya and maize prices in India rose last year despite a higher output because the crop was exported to Latin America, which had diverted its production for bio-fuel. So, Indian soya found its way to the market, which gave a better price. But these are dynamics of trade and technology which may be unsettling at times, but beneficial at the end of the day.
Make no mistake. This doesn���t mean inflation matters less. On the contrary, there are new compulsions to keep it within ���acceptable levels���. For a moment, let���s not get into the inadequacies of inflation measurement: WPI hides more than it reflects, consumer inflation captures a better picture, inflation for the rural landless is more than the urban non-manual class and varying figures calculated by different states. While significant, these are just about as fickle as the Sensex and the various stock indices; just like inflation, their movements may signal the collective mood, but is not the last word on collective wealth. The point is despite the infirmities, these tools matter more than ever.
It���s a time-tested truth that no government can afford high inflation: it affects the poor, the vast vote bank, far more than the well-heeled who can wrest a better deal from their employers and clients. Similarly, a high, volatile inflation puts off investors. There���s nothing new in all these. What has changed in the past few years is the dramatic expansion of the constituency that is ���sensitive��� to inflation, though in an indirect way. Today, the middle-class has turned borrower - be it mortgage, auto loans or a quick personal loan, there are few families which are free of loans.
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This vocal, urban India may not react if WPI is 5% higher than what it was a year ago; but it is sure to raise a hue and cry if a spiralling headline inflation either forces the central bank to hike interest rates (to discourage spending); or, dissuades it from cutting rates, as it happened last month. That���s when a higher EMI on the loans burn a hole in the household budget. And, EMI can rise faster than it falls: there have been rate hikes as inflation hardened from 4% to 6%, but no rate cuts when inflation dropped from 6% to 4%. The EMI club is a new animal that the government is learning to deal with. In this age of soundbytes, it can be a formidable force capable of pushing the government to tackle inflation.But the direct impact of inflation is uneven and hides a more cruel story. ���Inflation hurts the poor��� & ���tax cuts help the rich��� can be more than politics. It���s the truth. The poor, particularly the rural poor, is the most vulnerable to inflation since 80% of their expenses relate to food, and food prices have risen more than other items in the consumption basket. They are also the least powerful when it comes to protecting their earnings; they live in a world that���s bereft of dearness allowance, annual increments and better job offers.
But, there���s no economy where all pockets of population are insulated from price changes. Any government which tries this, will have to battle hyperinflation. The hard truth is someone has to take the hit. The saving grace is the emergence of the EMI payers in Mumbai, Delhi and countless other cities; their selfish outcry may eventually help the farmer in Nandurbar.
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